Eco Investor Guide

I approach an outlook for 2010 with great caution, as admittedly uncertainty reigns when it comes to market forecasts. The path of prognostications is littered with bold statements from seemingly intelligent people that failed to materialize. Harry Dent’s prediction of Dow 20,000 by 2009 did not quite pan out, though he did see a bubble bursting. Oil never reached $200/barrel a la Goldman’s prediction (they could still be right, as they were talking about the 2010-2012 time period).

Here’s a prediction from Wharton’s Jeremy Siegel in 2007: “I think the stock market will have another winning year in 2008. For every percentage point that stock returns fall below 8% (my prediction) this year, they should exceed 8% next year (meaning, for example, if stocks gain 6% this year, they should finish 2008 up 10%). And I believe that financial stocks, which have plummeted 18% so far this year, will outperform the S&P 500 Index next year as the credit crisis fades.”

Having peppered you with caveats, and though we try to expect the unexpected, we do spend some time thinking about how to position our investment assets to succeed in the coming one to two years. Here are some broad trends that we are trying to position our portfolios for:

1. In October 2009, we concluded that although the existing environment was tough for solar, the outlook was getting better and that solar stocks had a chance of turning the corner in 2010. Since then, the sector was up in the 10-20% range into the first week of January, but has since given most of that back.

In Germany there is talk of reducing the feed-in tariff for 2010 by 16-17% in April, which could have a significant effect on demand. One of the challenges of Solar is that it can’t stand alone quite yet; government support is a life-line. The question is whether cost can come down fast enough to make up for decreasing subsidy support. We still believe in Solar, but are not adding to the sector at the moment, until there is more clarity.

2. Wind energy is more cost competitive than solar. The issue in the wind industry is over- capacity in the short-term, and the risk of credit conditions deteriorating once more. The long-term picture for wind looks solid and the key players should be able to survive and do well.

There is a smaller risk of disruptive technologies unsettling the established players as compared to the solar industry. The short-term headwinds might provide a good entry point into wind stocks during 2010.

3. Investors are looking beyond wind and solar to battery storage, smart grid applications, transportation, and infrastructure and we think this trend will continue. In 2009, smart grid and energy storage outperformed wind and solar and unlike previous years, there was a true divergence among sub-sectors of the clean energy sector. Particularly energy efficiency plays are interesting, as these companies are selling cost savings. The economics are there, if the upfront costs can be financed, unlike most alternative energy plays, where cost- parity has not been achieved yet (unless of course one accounts for the true cost of fossil fuels; but that is unfortunately just an academic exercise). We have seen this play out in our portfolio, with stocks like EnerNOC (ENOC) (smart grid) and BYD (energy storage, hybrid cars) among our top performers for 2009 and solar stocks lower down the list.

To dowload the complete “JPS Global Investments Newsletter Vol 3, Issue 4: The Quarter in Review”, please visit us at: www.jpsglobalinvest.com